Balance Sheet Effects of Exchange Rate Changes and Debt Dollarisation: An Econometric Analysis on the Turkish Real Sector

The impact of exchange rate changes on the real sector is not limited to an expansionary competitive effect caused by domestic currency depreciation. The balance sheet effect may be a significant source of risk, especially for companies with high levels of debt in foreign currency, i.e., experiencing liability dollarisation. Exchange rate increases may raise risks by increasing the value of debts in domestic currency. The Turkish real sector faces significant balance sheet risks due to high debt dollarisation and domestic currency depreciation. This study analyses the impact of liability dollarisation and exchange rate changes on investments as the best indicator of sectoral performance through “balance sheet effect” and “competitive effect” channels with the GMM estimator using data for 76 sectors in Türkiye for 2009-2022. Our findings indicate that, while the corporate sector is exposed to a significant negative balance sheet effect due to short-run liability dollarisation, there are no significant effects of long-run liability dollarisation on investments. Also, there are no significant findings regarding the competitiveness effect channel. Therefore, the fragilities in the balance sheet of the Turkish real sector make it necessary for political decision-makers to avoid unexpected depreciation in the value of the Turkish lira.